Don’t Give Up on Health Care Cost Control

S.G.R. More than 99 percent of Americans have no idea what these three letters stand for. And yet they are extremely valuable: worth about $140 billion. This week, a House committee will finally take up the issue.

The S.G.R., or the Sustainable Growth Rate formula, was enacted as part of the Balanced Budget Act of 1997 to restrain the inevitable increase in Medicare’s annual spending on physician services. It set a reasonable target for each year’s increase, and Medicare was supposed to spend less than that amount. If it failed, then the per-service payments to physicians in the following year would be reduced to hit the target.

Nice idea in theory. Never worked out in practice.

Since 2002, the cost for physician services has consistently exceeded the S.G.R. target. Doctors have been delivering more services, and the services have become ever more complex and, therefore, expensive. But instead of enforcing the mandated cuts, every year Congress has passed a “doc fix,” coming up with billions to keep paying physicians the same amount and avert any reductions.

Strangely, despite never complying with the law, Congress has never seen fit to change the formula for calculating the target. Consequently, S.G.R. cuts have accumulated since 2002, to the extent that today the law ostensibly requires that physician payments be cut by 24.4 percent.
Everyone — Democrats and Republicans — agrees that the law is seriously flawed. Since the target level applies to total nationwide physician costs, there is no incentive for individual doctors to be more efficient. And the cuts are indiscriminate: they would hit high-quality, cost-effective doctors just as hard as inefficient free spenders, and underpaid primary-care doctors as much as overpaid specialists.

Physicians desperately want the S.G.R. repealed and replaced so they can charge what they want without the potential of massive cuts hanging over them each year. But according to the Congressional Budget Office, getting rid of it and simply letting payments increase would cost just under a projected $140 billion over 10 years. If Congress were to adhere to its “pay-as-you-go” principle of accounting for every new expenditure, it would have to find that money in either tax hikes or cuts in other programs — both nearly impossible in the current climate.

Enter the House Energy and Commerce Committee. This week, the committee is expected to begin marking up a bill that its subcommittee on health approved last Tuesday. The bill would repeal the S.G.R. formula and replace it with a stable annual 0.5 percent payment increase until 2018. Beginning in 2019, the bill would then link Medicare payments to the quality of care each physician provides, as measured by an enhanced quality reporting system.

Here are the problems. The 0.5 percent increase would put taxpayers on the hook for even more than $140 billion. In addition, that reporting system would duplicate a value-based payment system that was already established by the Affordable Care Act, simply increasing administrative costs. And here is the cherry on top of it all: the bill repeals a cost control without replacing it with anything.

The proposed cure would be worse than the disease. This permanent “doc fix” is not linked to any reform or modernization of how physicians are paid. While the bill does place more value on primary care, which is important, the physician lobby is already mobilizing to remove this one good part of the bill. Overall the bill does nothing to solve the root of Medicare’s cost problem. Adopting it would be a huge missed opportunity.

Repealing the S.G.R. is the best leverage the government has with the country’s doctors. Physicians seem otherwise not strongly inclined to adopt payment reform or modernize the health care delivery system. But we can give doctors what they want — the end of the S.G.R. — and restrain spending at the same time. We should link the repeal of the law to a timeline that moves Medicare off the inflationary fee-for-service payment system, which is the reason we need a formula to limit spending in the first place.

Health policy experts agree that fee-for-service payment incentivizes quantity over quality. Physicians make more money by ordering more tests, seeing patients more frequently in follow-ups and providing more treatments. The payment system is a key accelerator driving up Medicare costs — and therefore the federal government’s deficit.

The only way forward is to adopt alternatives to the fee-for-service system, like bundled payments for treating patients with particular conditions or patient-centered care that is focused on overall health instead of individual procedures. Representatives Allyson Y. Schwartz, Democrat of Pennsylvania, and Joe Heck, Republican of Nevada, have put forward one good proposed reform, which would tie an S.G.R. repeal to a slow reduction in fee-for-service payments to those physicians who do not switch to bundled payments and other payment models. But ideally we would go even further and set a goal for moving 75 percent of Medicare physician payments off fee-for-service completely by 2023.

In fixing this law, we have a tremendous opportunity to re-engineer the perverse incentives that plague our health care system. If we go the route proposed by the House subcommittee, that opportunity will be wasted.

Correction: July 30, 2013An earlier version of this article contained an incomplete byline. It was written by Ezekiel J. Emanuel and Topher Spiro.

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Ezekiel J. Emanuel, an oncologist and former White House adviser, is a vice provost and professor at the University of Pennsylvania. He is a contributing opinion writer for The New York Times on a range of topics including health and health policy. Topher Spiro is the vice president for health policy at the Center for American Progress.